Chapter 1

Limits,
Alternatives,
and Choices
McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives
Economics defined
Role of economic theory
Microeconomics vs.
macroeconomics
Resource scarcity and the
economizing problem
Production possibilities model
1-2

Economics Defined
Economic wants exceed
productive capacity
Social science concerned with
making optimal choices under
conditions of scarcity

1-3

The Economic Perspective

Thinking like an economist

Key features:
Scarcity and choice
Purposeful behavior
Marginal analysis

1-4

Scarcity and Choice

Resources are scarce

Choices must be made
There is no free lunch
Opportunity cost

1-5

Purposeful Behavior

Rational self-interest
Individuals and utility
Firms and profit
Desired outcomes

1-6

Marginal Analysis

Marginal benefit
Marginal cost
Marginal means extra
Comparison of marginal benefit
and marginal cost

1-7

Economic Models

The scientific method

Cause and effect
Economic principles
Simplification of reality
Other-things-equal assumption
Graphical expression
1-8

Macro vs. Micro

Macroeconomics
Aggregate

Microeconomics
Individual Units

Positive Economics
Normative Economics
1-9

Individuals Economizing Problem

Limited income
Unlimited wants
A budget line
Tradeoffs & opportunity costs
Make best choice possible
Change in income
1-10

A Budget Line
DVDs Books
$20
$10

6
5
4
3
2
1
0

0
2
4
6
8
10
12

12
10
Income = $120
Quantity of DVDs

$120 Budget

Pdvd = $20

=6

Unattainable
6
Income = $120

Pb = $10

2
0

= 12

Attainable

10

12

Quantity of Paperback Books

14
1-11

Societys Economizing Problem

Scarce resources
Land
Labor
Capital
Entrepreneurial Ability

Factors of production
1-12

Production Possibilities Model

Illustrate production choices
Assumptions:
Full employment
Fixed resources
Fixed technology
Two goods
1-13

Production Possibilities Table

Production Alternatives
Type of Product

Pizzas

10

(in hundred thousands)

Industrial Robots
(in thousands)

Plot Points to Create Graph

1-14

Industrial Robots

Production Possibilities Curve

A

14
13
12
11
10
9
8
7
6
5
4
3
2
1

Unattainable

Economic
Growth

B
C

D
D

Now Attainable

Attainable

E
0

8 9

Pizzas
1-15

Industrial Robots

Production Possibilities Curve

A

14
13
12
11
10
9
8
7
6
5
4
3
2
1

Unattainable

Law of Increasing
Opportunity Cost

B
C

Shape of
the Curve

Attainable
E

E
0

8 9

Pizzas
1-16

Industrial Robots

Production Possibilities Curve

A

14
13
12
11
10
9
8
7
6
5
4
3
2
1

Unattainable
C

Under or
Unemployment

E
0

8 9

Pizzas
1-17

The Future Economy

Consequences of unemployment
Economic growth
More resources
Better quality resources
Technological advances

1-18

Future
Curve

Current
Curve

Goods for the Present

Presentville

Goods for the Future

Goods for the Future

Future Possibilities

Future
Curve
F

Current
Curve

Goods for the Present

Futureville
1-19

International Trade

Production point
Consumption point
Specialization
Preview

1-20

Marginal Benefit & Marginal Cost

Optimal Allocation of Resources

15

MC

MB = MC

10

d
MB

2
3
Quantity of Pizza
1-21

LAST Word:
Pitfalls to Sound Economic Reasoning

Biases
Loaded terminology
Fallacy of composition
Post hoc fallacy
Correlation but not causation

1-22

Key Terms

economics
economic perspective
opportunity cost
utility
marginal analysis
scientific method
economic principle
other-things-equal
assumption
macroeconomics
aggregate
microeconomics
positive economics
normative economics
economizing problem

budget line
economic resources
land
labor
capital
investment
entrepreneurial ability
factors of production
consumer goods
capital goods
production possibilities curve
law of increasing opportunity
costs
economic growth
1-23

The Market
System and the
Circular Flow

1-24